Dec. 11, 2012 at 7:52 AM ET
This holiday season, you will be flooded with “special financing” offers: Buy now and pay no interest on your purchase for six, 12 or even 18 months – if paid in full.
A new survey from the website Card Hub.com finds that nearly two-thirds of the major retailers are offering a deferred interest plan this holiday shopping season. Some are from the store itself, others are provided by a store-branded credit card.
It’s mighty tempting to buy this way, especially when you don’t have the money for a big purchase. “Why not let them finance our new TV or computer or refrigerator?” you say to yourself.
Before you take the plunge – make sure you understand how that “no interest” offer works. It’s different from the 0% interest rate promotions used by some credit card companies to get new customers.
With a 0% credit card, the interest is waived during the introductory period. After that, the regular interest rate applies to any remaining balance.
With a retailer’s deferred interest program, if you don’t pay off the balance in full by the end of the term, the regular interest rate applies to the entire purchase.
That’s right, they go back and retroactively charge you interest on the balance you’ve already paid off, as if you’d never been offered that zero percent financing.
“That’s just crazy,” said Card Hub CEO and founder, Odysseas Pappadimitriou. “This is one of the most glaring ‘gotcha’ practices that exist in consumer finance today. No customer would think that a store could do this. That’s what makes this so dangerous.”
And if this happens, the interest rate you pay will be painful.
“It will be much higher than if you had a low-interest credit card,” said Gerri Detweiler, a personal finance expert with Credit.com. “Most deferred payment offers start at 17 percent interest and go as high as 25 percent or more.”
Look at the numbers. Let’s say you buy a $1,000 TV and take advantage of the six-month deferred interest offer. After that, the regular rate of 25 percent kicks in. You expect to pay off the set during that grace period, but something comes up and it takes you nine months.
In this scenario, you’ll be charged 25 percent interest for nine months: $108. It’s as if the no-interest financing never existed.
If you’d purchased that TV using a traditional credit card with a 14 percent APR, you’d only pay $60 interest during those nine months. That’s a big difference and it gets worse the longer the term of the deferred interest.
The bottom line
The best way to avoid this trap is the old-fashioned method of buying things when you’ve saved up the money to pay for them.
“Debt is debt, regardless of any deferment of interest,” noted John Ulzheimer, president of consumer education at SmartCredit.com. “Getting into deferred interest debt still means you're in debt, period. The fact that the interest is deferred should be meaningless to the smart consumer.”
Play it smart. If you are going to charge it, avoid financing from retailers or their co-branded credit cards and rely on traditional credit cards.
If you qualify for a card that offers zero percent interest on new purchases, Card Hub suggests the Slate Card from Chase (no interest on new purchases for 15 months) and the Citi Diamond Preferred Card (no interest on new purchases for 18 months).
My two cents
The ability to charge interest on balances that have already been paid is abusive and should be stopped. The CARD Act already prohibits this with most credit card offers. Why is this allowed for these transactions? It’s a giant loophole that needs to be closed, either by Congress or the Consumer Financial Protection Bureau.